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HMRC internal manual

VAT Government and Public Bodies

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HM Revenue & Customs
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Local authority education services: school private fund income

Introduction

Schools can generate income independently of the local authority. For example:

  • vending machines
  • tuck shops
  • sale of school uniform
  • school photographs (see VATGPB7840) and
  • charges for the use of the premises outside normal hours.

This income is usually referred to as ‘private fund’ income.  It is generally, but not always, held in a separate bank account.

Because private fund income is generated from activities undertaken independently of the local authority, a private fund is not part of the local authority for VAT purposes.

The private fund may be operated by the governing body, the head teacher, acting as agent of the governing body, or some other entity, such as a Parent-Teacher Association.

Where a school’s VATable private income exceeds the VAT registration threshold it is required to register for VAT.  Consequently, these activities do not fall within Section 33 (see VATGPB4000).

If the school transfers any of its private fund income to the local authority there might be a taxable supply by the LA to the school/ private fund. Documentary evidence should give information on why the income was transferred. (Please see section below).

Input tax recovery on purchases using private funds

If the private fund is registered separately for VAT it can recover input tax subject to the normal rules.  Consequently, local authorities cannot recover the VAT incurred on private fund expenditure.

Alternatively, private fund income, can be donated to the local authority and then used to buy goods and services on the private fund’s behalf.

Where income is donated the local authority can recover the VAT incurred, so long as it:

•             places the order;
•             receives the supply;
•             holds a VAT invoice on which it is shown as the customer;
•             pays for the supply;
•             retains ownership of any goods  purchased;
•             uses it, or makes it available, for its own non-business purposes;

and
•             maintains a record of purchases and how they were used

Exceptions to the recovery of input tax by local authorities when using private funds

The VAT treatment of Voluntary Aided/Foundation Schools is different to the treatment of Maintained schools because the LA is legally responsible for a wider range of activities.

For Voluntary Aided/Foundation Schools the recovery of VAT by an LA will not be allowed in the following circumstances:

  • The income used is taken from a direct grant from the  Department for Education to the governing bodies;

Or

  • The income is used to fund works that are the responsibility of the governors of a voluntary aided school.  The most common of these will be capital works.

Income from lettings

Local Authority Maintained Schools

In the case of local-authority-owned buildings any income a maintained school earns from letting its premises normally goes to the local authority.  However, the local authority may agree, as part of a scheme under section 48 of the School Standards and Framework Act 1998 that the school can use the income.  Under this agreement the school is acting as an agent for the local authority. The Local Authority is then entitled to recover VAT on supplies purchased by the school, subject to normal VAT recovery rules.  

Voluntary Aided and Foundation Schools

Section 48 does not apply to school buildings in Voluntary Aided and Foundation schools because the local authority does not own the school buildings.
If the income from the buildings is donated to the delegated budget then the local authority can apply normal section 33 rules.